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財務工程第一講次 Overview of Financial Engineering1. The Scope of Financial Engineering 1. Definitions * John Finnerty (1988): Finnerty, J.D. (1988), “Financial Engineering in Corporate Finance: An Overview,” Financial Management, Winter 1988, pp. 14-33. “Financial Engineering involves the design, the development, and the implementation of innovative financial instruments and processes, and the formulation of creative solutions to problems in finance.”* Marshall and Bansol (1992): Marshall, John F. and Vipul K Bansol (1992), Financial Engineering: A Complete Guide to Financial Innovation, NY: Allyn & Bacon, Inc. “Financial Engineering is the development and applications of financial technology to solve financial problems and the creation of value by the identification and exploitation of financial opportunity.”2. Examples of Financial Engineering * Introduction of a revolutionary new product such as the first swap, the first mortgage backed product, the first zero coupon bond (strips), or the introduction of junk bonds to finance leveraged buy outs. * The extension of futures trading to a commodity or a financial instrument not preciously traded in a futures pit, the introduction of a swap variant, or the creating mutual fund with new focus. * The piecing together of existing products and processes: E.g., the use of the existing products to reduce a firms financial risks, to reduce the cost of a firms financing, to gain some accounting or tax benefit, or to exploit a market inefficiency. * Financial Engineering is not limited to corporate and institutional applications. For example, it can be directed at the retail (or customer) level, such as adjustable rate mortgages, cash management accounts, NOW account, IRAs and Keoghs, and various new form of life insurance.3. Career for Financial Engineers * Investment banks * Commercial banks * Insurance companies * Corporate: Corporate finance, trading, investment and money management, and risk management. 4. Tools of Financial Engineering * Conceptual Tools: Valuation theory, portfolio theory, accounting relationships, and tax treatment under different forms of business organization. * Physical Tools: (i) Instruments: fixed income securities, equities, futures, options, swaps, and dozens of variants on these basic themes. (ii) Processes: electronic securities trading, public offerings and private placement of securities, shelf registration, and electronic funds transfer.2. Factors Contributing to the Growth of Financial Engineering1. Environmental Factors: * Price volatility: Commodity prices, interest rates, foreign exchange rates. * Globalization of the markets * Tax asymmetries: Tax asymmetries exist for several reasons: (i) Some industries are granted special tax exemptions and preferences in order to encourage their development and growth or to direct their energies in particular directions. (ii) Different countries impose different tax burdens. (iii) The nature of their past performance has left some firms with sizable tax credits and write-offs which effectively eliminate any tax obligations for some years to come. * Technological advances: Computer, network systems, improvement in communications, advances in software programs. * Advances in financial theory * Regulatory change and competition: Deregulation of industry. 1933年，美國記取經濟大恐慌的教訓，頒布了格拉斯斯蒂格爾法案(Glass-Steagall Act, 簡稱G-S法案)，建立金融業分業經營的防火牆，該法案禁止商業銀行從事股票投資。這種分離，使經濟成長中最重要的融資需求可透過兩條獨立的管道來滿足：一是商業銀行的信貸，即間接融資；二是資本市場的籌資，即直接融資。但1980年代以後，金融自由化的浪潮再次興起，各國紛紛拆除金融市場和商業銀行之間的防火牆，商業銀行的信貸業務和投資銀行的證券業務可合而為一，因此，銀行部門的貸款可透過投資銀行部門的包裝，將之證券化，又變成為投資工具，出售予投資人，風險交叉傳遞，防火牆的功能消失無存。此外，存款機構解除管制與貨幣控制法案(The Depository Institutions Deregulation and Monetary Control Act of 1980)廢除了大部份定存款利率管制。Garn-St Germain Depository Institutions Act of 1982允許銀行提供類似貨幣市場基金的貨幣市場帳戶。 1933年格拉斯斯蒂格爾法案(Glass-Steagall Act, 簡稱G-S法案)，禁止商業銀行從事股票投資。但1980年代以後，金融自由化的浪潮再次興起，商業銀行的信貸業務和投資銀行的證券業務可合而為一。 * The cost of information and the cost of transaction2. Intrafirm Factors * Liquidity needs: (i) Some innovations were designed to provide easier access to cash while others were designed to make it easier to put temporarily unneeded cash to work. Examples, money market funds, money market account, sweep accounts, electronic funds transfer and electronic payment systems, the development and rapid expansion of the commercial paper and certificate of deposit market, and the development of the repo market.(ii) Other innovations have sought to create long term securities: floating rate notes, adjustable rate preferred stock, adjustable rate mortgages, and floating rate rating-sensitive notes. * Risk aversion: e.g., CMOs, CDS, swaps. * Agency costs * Quantitative sophistication and management training * Accounting benefits: e.g., defeasance of a firms debt and debt for equity swaps.3. The Knowledge Base of the Financial Engineer1. Theory Basic economic and financial theory include: the sources of the value and wealth, measures of value and return, methods for identifying risk exposures, various measures of risk and applications, basic portfolio theory, basic hedging theory, basic option pricing theory, risk-return relationship, the sources of agency costs.2. Mathematical and Statistical Skills Mathematical Skills: Calculus, linear and nonlinear optimization techniques, logarithm and exponential functions, the ability to work with formulas, equations, and graphs.Statistical Skills: distribution theory, basic statistics (means, variances, standard deviations, correlation coefficients), regression and correlation techniques, variance analysis, stochastic calculus. 3. Modeling Skills Most areas of financial engineering require advanced modeling skills.4. Product knowledge * Financial Engineers working in corporate treasury need to be thoroughly familiar with tools used to achieve short-term and long-term financing objectives. * Financial Engineers working in risk management need to be well versed in derivative products. * Financial Engineers working in financial planning need to be well versed in retail level financial products.5. Knowledge of Relevant Technology At the broadest level, relevant technology includes economic and financial theory, mathematical and statistical techniques, product knowledge, computer and telecommunication hardware, and computer software. 6. Accounting, tax and LegalAppendix:What is Financial Engineering?(/what-is-financial-engineering.htm)Financial engineering is a process that utilizes existing financial instruments to create a new and enhanced product of some type. Just about any combination of financial instruments and products can be used in financial engineering. The process may involve a simple union between two products, or make use of several different products to create a new product that provides benefits that none of the other instruments could manage on their own. One excellent example of financial engineering is financial reinsurance. Companies that offer reinsurance options essentially provide a way for the ceding insurer to minimize a drain on available resources when a major shift in premium growth or reduction is taking place. In this scenario, the process of financial engineering helps to create a stable environment that will allow the insurer to remain solvent and stable even when extreme conditions exist. For the consumer, the work of a financial engineer to create new finance product offerings can be a great advantage. In some instances, the new and improved product is simply a repackage of several independent but complimentary products made available at a lower price. For example, the consumer may find that purchasing insurance coverage that provides dental, hospital, and prescription coverage may be significantly less expensive than purchasing individual plans. Financial engineering works in other environments as well. The financial theory of offering several existing products under one package has become